Interest Rates on Thursday

Melissa177

I think 12/1 is pretty good odds for a 0.5 rise though.

Having read "The Wisdom of Crowds", I don't think I'll be laying money on that though.

Generali

Guy_Montag wrote: »

I think some countries do work it that way - the govt. effectively removes money from the economy through tax. Turkey springs to mind. Can anyone shed any light?

The British Governments of the 1970s used to try to use fiscal policy and banking law to control inflation.

The idea is that by running a fiscal surplus (taxing more than you spend) you take money out of the economy, reduce demand and thus curb inflation.

Conversely, if you have deflation/recession (and unemployment) you run a budget deficit and use that money to employ road diggers or NHS managers or whatever. They spend that money and then other people are employed to provide these people with goods and services and so it goes on.

The trouble is, it doesn't work. If you run a deficit, the money to pay for it comes from somewhere. It comes from private sector investment by a process known as crowding out. If private sector investment is reduced, so is private sector employment. This makes the problems worse as private sector investment tends to be much more productive than public spending.

A good example of how crowding out works is over the past few years where Government borrowing both on balance sheet and off (via PPI) has led to a situation whereby public sector employment has risen but private sector employment has remain virtually static.

P.S. If you want examples of good economic governence then probably best to start somewhere other than Turkey!

Guy_Montag

Generali wrote: »

The British Governments of the 1970s used to try to use fiscal policy and banking law to control inflation.
...
P.S. If you want examples of good economic governence then probably best to start somewhere other than Turkey!

So that's fair enough if you're runninng on a deficeit, but what about removing tightening consumer spending using tax (bringing in a surplus & effectively removing money from the economy).

I'm not suggesting we follow Turkey's example, merely that they use the system.

roswell

Voted for 0.5% but hoped for this 2 months ago. so reality.

Pray for .5
expect .25
and expect heads to roll if they hold.

no matter what they saw about being proactive history shows they are reactive they wait for the figures on inflation then decide what the movement is.

Generali

Guy_Montag wrote: »

So that's fair enough if you're runninng on a deficeit, but what about removing tightening consumer spending using tax (bringing in a surplus & effectively removing money from the economy).

I'm not suggesting we follow Turkey's example, merely that they use the system.

Because it's highly ineffective. Changes in taxation don't necessarily change demand at all (and that's assuming that inflation is demand led, a big assumption).

Inflation is primarily a monetary phenomenon and so monetary policy is the most effective way to fight it.

hagler

They dont need to increase rates as the earlier increases are just starting to bite now and take their effect on the economy, but probably a 0.25% increase which is not even needed.

ManAtHome

hagler wrote: »

They dont need to increase rates as the earlier increases are just starting to bite now and take their effect on the economy

Is that why inflation is going up..?

mystic_trev

hagler wrote: »

They dont need to increase rates as the earlier increases are just starting to bite now and take their effect on the economy, but probably a 0.25% increase which is not even needed.

CPI will start droping this year, that's a well known fact, but probably not by as much as the BoE is hoping. The projections going forward 18 months / two years aren't looking so good, which is why IR's will have to stay high for the next few years and therefore the BoE have to start targeting that now.

If I was a FTB I wouldn't purchase at the moment as I think that they'll be some kind of "correction" soon. However those that do (and have done their figures!) are probably in a much better position than those who purchased in a low interest rate environment two of three years ago.

Generali

ManAtHome wrote: »

Is that why inflation is going up..?

Because the supply of money is increasing. If the amount of money in the economy is increasing faster than the quantity of goods and services able to be bought, the price of them will rise.

This inflation has been seen primarily in the asset markets (e.g. housing). It is startnig to spread to the markets for other goods and services.

hagler

ManAtHome wrote: »

Is that why inflation is going up..?

I think inflation has more to do with profiteering and monopolies then anything else. The supermarkets have a stranglehold on consumers, you cant really go anywhere else to do your weekly shopping and because of that they mess about with prices.

The utility companies are on a big rip off, if you look at the prices of wholesale gas supplies they are not expensive but the companies have raised prices by alot and do not like to decrease them. This winter has been one of the warmest on record and yet gas companies are making record profits even though people are using much less gas and electricity.

If you look at sectors of the economy where there is true competition you will see that prices do not go up by much or even come down. For example fixed line telephones/broadband/insurance in all of these sectors prices remain competitive and these companies still make healthy profits.

When statistics are released about wage busting pay rises etc and how these will impact on rates, can anyone on this board tell me if they have had a wage busting pay rise, i bet not many can. The only people having these wage rises and fat pensions are MP's, fat cat company directors and city bankers.

Even the view of petrol affecting prices is misconceived, the weakening of the dollar against sterling means that petrol prices are manipulated for example when I went abroad last year and petrol was about 27p/litre so the increase in petrol prices is an increase in taxes and not the price of petrol itself. If we joined the euro we would be able to see more clearly how we are getting ripped off as we could compare prices with every other european country.

If there was less monopolies, and less unscrupolous profiteering then inflation would not be where it is. And this argument about the growth of money supply increasing inflation is a dodgy argument because even with the increase in supply of money the value of sterling has not dropped compared to other currencies.